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Interview

The Anatomy of Bear Markets

Goldman SachsPeter Oppenheimer, Liz
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Bear Market Classifications and Historical Profiles

  • Historical Context: Analysis of US stock markets over the last 120 years identifies just under 30 bear markets, categorized into three distinct types:
    • Structural:
      • Least common type, typically preceded by banking or real estate crises.
      • Average decline of ~60%, occurring over 3–3.5 years.
      • Full recovery to starting points typically requires a decade.
    • Cyclical:
      • Most common type, usually triggered by rising interest rates at the end of an economic cycle.
      • Average decline of ~30%, occurring over ~2 years.
      • Average recovery time to starting points is ~4 years.
    • Event-Driven:
      • Triggered by exogenous shocks (e.g., the current pandemic) with no prior pattern of rising rates or imbalances.
      • Average decline of ~30% over a shorter duration of 6–9 months.
      • Rapid recovery profile, with markets returning to starting points in ~15 months.

Current Downturn Analysis and Expectations

  • Classification: The current market downturn is characterized as an event-driven bear market due to the sudden nature of the economic shock.
  • Scale vs. Speed:
    • Major global equity markets have fallen 30–35%, aligning with historical averages for event-driven cycles.
    • The entry into bear market territory (down >20%) occurred in 16 trading days in the US, which is more than twice as fast as the previous fastest downturn (1929).
    • Record volatility includes multiple days with moves exceeding 9%.
  • Projected Outlook:
    • Expected to experience a sharper V-shaped recovery than cyclical or structural events.
    • Lows are anticipated to be lower than average due to unprecedented declines in economic activity.
    • Strong rebounds in corporate profits and stock prices are forecast for late this year and next year.

Conditions for Market Inflection and Recovery

  • Policy Support: Recovery requires aggressive, coordinated policy measures, including:
    • Monetary easing designed to ring-fence the financial system.
    • Fiscal packages featuring loan guarantees and direct labor market subsidies.
  • Valuation Dynamics:
    • Significant valuation improvements have occurred, but further declines may be necessary to restore investor confidence.
    • Lower valuations are needed to offset uncertainty regarding future profits and dividends.
  • Macro Data Triggers:
    • The inflection point is expected to coincide with a turn in the rate of deterioration (second derivative improvement) in macro data and infection rates.
    • Market recovery is likely to precede positive fundamental news, occurring as conditions begin to stabilize rather than fully improve.